Germany’s Allianz has agreed to pay about $6 billion and a U.S. asset management unit will plead guilty to fraud after a group of multibillion investment funds collapsed amid market turmoil triggered by the coronavirus pandemic in 2020.
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An indictment was unsealed today in the Southern District of New York charging Gregoire Tournant, the Chief Investment Officer and co-lead Portfolio Manager for a series of private investment funds managed by Allianz Global Investors U.S. LLC (AGI), with securities fraud, investment adviser fraud and obstruction of justice offenses in connection with a scheme to defraud investors.
Those funds ultimately collapsed, leading to billions of dollars of investor losses. Tournant surrendered to Postal Inspectors in Denver, Colorado, this morning and is expected to be presented later today.
Also unsealed on today are the guilty pleas of Trevor Taylor and Stephen Bond-Nelson in connection with their respective roles in the scheme.
Taylor pleaded guilty pursuant to an information before U.S. District Judge Denise Cote on March 8. Bond-Nelson pled guilty pursuant to an information before U.S. District Judge Paul A. Engelmayer on March 3. Both are cooperating with the government.
U.S. Attorney Damian Williams for the Southern District of New York and Inspector-in-Charge Daniel B. Brubaker of the New York Office of the U.S. Postal Inspection Service also announced a plea agreement pursuant to which AGI will plead guilty to securities fraud in connection with this fraudulent scheme, and pay more than $3 billion in restitution to the victims of this fraud, pay a criminal fine of approximately $2.3 billion, and forfeit approximately $463 million to the government.
According to the allegations in the indictment and the agreement unsealed today in Manhattan federal court:
Between 2014 and 2020, Gregoire Tournant, the defendant, was the Chief Investment Officer of a set of private funds at AGI known as the Structured Alpha Funds. These funds were marketed largely to institutional investors, including pension funds for workers all across America.
As alleged, Tournant and his co-conspirators misled these investors into believing that the funds were protected from a sudden stock market crash with particular hedges.
But in late 2015, as the cost of those promised hedges increased, Tournant decided to lie and secretly buy cheaper hedges that provided much less protection to investors. As alleged, Tournant and his co-conspirators also provided investors with altered documents that were sent to investors to hide the true riskiness of the funds’ investments, including that they were buying cheaper hedges.
In March 2020, following the onset of market dislocations brought on by the COVID-19 pandemic, the funds lost in excess of $7 billion in market value, including over $3.2 billion in principal, faced margin calls and redemption requests, and ultimately were shut down.
More than 100 institutional investors, representing more than 100,000 individuals, were victims of this scheme.
These institutional investors included, among others, pension funds for teachers in Arkansas, laborers in Alaska, bus drivers and subway conductors in New York City, as well as religious organizations, engineers, and other individuals, universities and charitable organizations across the United States.
The scheme alleged was an egregious, long-running and extensive fraud that went undetected for years. It occurred at a very profitable component of AGI – one that accounted for 25% of AGI’s revenue in recent years, which amounted to hundreds of millions of dollars.
As alleged, one of the ways Tournant carried out the fraud was by marketing the fact that he worked for a well-respected financial institution, AGI, which is a part of the Allianz SE (Allianz) family. Allianz is one of the world’s largest financial services companies and one of the world’s largest insurance companies.
Tournant touted the protections provided by the funds’ position within the global Allianz corporate structure, calling Allianz a “master cop†that would ensure that Tournant followed the risk guidelines promised to investors.
Despite Tournant’s claim that Allianz acted as a “master cop†looking over his shoulder, no one at AGI or Allianz was verifying that Tournant and his colleagues were actually adhering to the investment strategies promised to investors.
No risk or compliance personnel at AGI verified, attempted to verify or were responsible for verifying that Tournant and his colleagues were purchasing hedging positions within the range that was represented to investors.
Much of this historic fraud was made possible because AGI’s control environment was not designed to verify that Tournant and his co-conspirators were telling investors the truth.
Because AGI, a registered investment adviser, failed to provide meaningful oversight, Tournant and his co-conspirators were able to deceive investors about the risks they were taking with their money.
In addition, as alleged, in the summer of 2020, after the onset of the pandemic and in order to cover up the fraudulent scheme, Tournant attempted to obstruct an investigation by the U.S. Securities and Exchange Commission (SEC) into the circumstances that led to the losses in March 2020. ■